Why the Conflict in Syria Is Hitting the Markets So Hard

global economySyria is on the verge of expanding its current conflict to include the United States and its allies as the chaos in the Middle East continues. Then there are also the tensions in Egypt and Iran.

If the U.S. and its allies attack Syria, the impact on the global economy and the stock market will be negative and how bad it gets will largely be dependent on the degree and length of the war.

We are already seeing what’s happening in the market. Oil prices have been rising, especially Brent crude, due to the obvious impact the escalation of a war would have on oil flow.

The chart below of the spot price of Brent crude oil shows the breakout at the $110.00 level.

Brent Crude Oil - Spot Price Chart

Chart courtesy of www.StockCharts.com

So, you have Iran and Iraq as neighbors of Syria. While both are not part of the Organization of the Petroleum Exporting Countries (OPEC), there will still clearly be a disruption to the oil flow, especially to Europe and Asia.

If you are an active trader, you should look at either buying oil-based exchange-traded funds (ETFs) or oil futures, or playing the market via leveraged call options on oil. Either way, money will be made if a war surfaces—just think back to what happened in Iraq.

Of course, with higher oil prices comes a major hike in gasoline prices. But that’s clearly not what we want to see at this time, given the lack of consumer spending that America needs to drive its gross domestic product (GDP) growth.

The one thing is that should the situation in Syria escalate, the Federal Reserve may hold off on tapering until October or December. Failure to do so could weaken the U.S. economy.

The second money-maker in the case of an outbreak in Syria is gold, which has already been surging higher as capital rotates away from equities and into the safety of gold.

Note the pop in the chart below and the uptrend since a bullish double-bottom formation in July, based on my technical analysis.

Gold-Spot Price Chart

Chart courtesy of www.StockCharts.com

Yet in both the case of oil and gold, I view the buying opportunity at this time as a trading strategy, and not a shift in the commodities’ underlying fundamentals. If nothing happens in Syria, I doubt gold and oil will hold or move higher. (Read “Yes, We’re Bullish on Gold, But Here’s One Bear’s Case Worth Reading.”)

With this in mind, I wouldn’t be going out and accumulating gold mining or oil exploration stocks if the Syrian crisis intensifies.

Rather, I would trade the underlying commodity in gold and oil via options, futures, or ETFs; I’d avoid stocks, however, since there is a tighter correlation between the actual commodity and prices.